Microsoft buyback, take 2

Firm switches tactics after few investors part with stock

P-I STAFF AND NEWS SERVICES

Published 10:00 pm, Friday, August 18, 2006

Microsoft Corp. is switching tactics in its $40 billion stock buyback program after shareholders tendered only $3.8 billion worth of shares in response to its "Dutch auction" repurchase offer -- well below the $20 billion it was ready to spend.

The Redmond company now says it will add up to $16.2 billion to its long-term, traditional stock buyback program, almost doubling that plan's repurchase authorization to $36.2 billion over the next five years.

The lower-than-expected response to the Dutch auction may be a sign of optimism among investors, anticipating the stock will rise above the price Microsoft was offering.

Microsoft has been sitting on a huge pile of cash that it didn't think it needed immediately for things such as legal expenses and acquisitions. As of June 30, the end of its fiscal year, Microsoft had $34.16 billion in cash and short-term investments.

Under the Dutch auction, shareholders indicated how many shares they wanted to sell and at what price, within Microsoft's specified range of $22.50 to $24.75. The market price of the company's shares rose 8 percent, to $24.70, between the time the Dutch auction started July 21 and ended Thursday.

In trading Friday, the company's shares rose another 4.4 percent, to close at $25.79. As a result of the increase, the company would be able to buy back fewer shares with the available money in the open market than under its Dutch auction offer.

Because the company is buying back fewer shares than expected, the effect on Microsoft's earnings per share isn't expected to be as significant in the short run.

In a note to clients, Goldman Sachs analyst Rick Sherlund said he now believes the buyback could result in an additional 3 cents to 4 cents in earnings per share for the current fiscal year, down from his previous expectation of an extra 6 cents.

Under Microsoft's latest financial guidance, issued when it announced plans for the buyback, the company forecast earnings per share of $1.43 to $1.47 for the current fiscal year, ending June 30.

However, Sherlund wrote that shifting the $16.2 billion to the open market "will likely be a positive for the trading of Microsoft stock."

Microsoft announced on July 20 that it would seek to buy back $20 billion of shares, or about 8 percent of the outstanding stock, for $22.50 to $24.75. The company said Friday that shareholders tendered 155 million shares, or 1.5 percent of the company's stock, at $24.75.

In July, Microsoft also said it would spend another $20 billion on more traditional stock repurchases by June 2011, and that is the program it increased on Friday. It also said in July that it had completed a previously announced $30 billion stock repurchase program.